SWEDEN YESTERDAY became the latest European country to take steps to stabilise its financial system by guaranteeing up to $205 billion (€ 150 billion) of new bank borrowing and creating a 15 billion kroner fund to take direct stakes in its banks if needed.

Sweden had insisted there were few problems in its banking sector but has been forced to match other European governments' stabilisation measures and respond to fears that its lenders might not escape the effects of the global financial crisis unscathed.

In particular, there were worries that a sharp correction in the economies of the Baltic states of Latvia, Estonia and Lithuania could undermine Sweden's banks, which control two-thirds of total lending in these former Soviet states. Fears over their Baltic exposure are one reason that share prices of Swedbank and SEB have almost halved this year.

The new package involves a pledge to guarantee up to $205 billion of new medium-term bank borrowing and a separate fund that can be used to buy preference shares in any bank that needs a capital boost. As part of the legislation, due to go before parliament next week, the government will also assume the powers to take over banks if deemed necessary.

Mats Odell, minister for financial markets, said any institution that receives a capital injection must agree to limit salaries and bonus payments to managers. Anders Borg, finance minister, said Sweden would also examine its deposit guarantee programme, having already raised the guarantee on bank deposits to SKr500,000 this month.

Sweden, which is not part of the eurozone, has agreed to guarantee deposits at foreign banks with clients in Sweden if their own governments cannot do so and widened the types of accounts covered.

The Finnish government said yesterday it would propose legislation enabling the banking sector to ask the state for guarantees for up to €50 billion of new borrowing and to provide up to €4 billion of new equity. "The Finnish financial markets have also shortened substantially and thinned out but there hasn't been the kind of acute disruption that there has been in other markets," said Peter Nyberg, head of the finance ministry.- ( Financial Times service)